A significant body of evidence, both academic and empirical, underpins the team’s commitment to the discipline of value investing. Our interpretation of this approach centers on investing in well-capitalized businesses where the market rating of invested capital does not fully reflect the long-term productivity of that capital. Our team is structured and our process designed to focus all our efforts on uncovering such opportunities.
We believe one of the reasons that the value premium endures is because shares are not always priced on the basis of their long-term earnings power. Long-term thinking features throughout our process; our screen considers 10 years of history, our due diligence focuses on through-cycle earnings power and our holding periods are measured in years. We are patient investors.
Low multiples do not always correspond to good value. Detailed financial and fundamental analysis is crucial to our understanding of the long term earnings power, the capital required to support those earnings, and financial strength of the company in question. Only when we have assessed the quality of a business, can we conclude as to whether the price is attractive.
To effectively allocate capital on the basis of upside to intrinsic value, valuations must be comparable; rigor, discipline and consistency are embedded throughout our process. The metrics we employ in our screening process, the accounting adjustments we apply, the financial models we use, and the valuation routines we deploy are all uniform across the process.
We believe that concentrated portfolios drive us to invest in only the most compelling opportunities, while avoiding the perils of over-diversification. We cast a very wide net, carry out detailed research, and then focus our portfolios on the best ideas. All of our Spotlight strategies have a high active share.
We believe the biggest risk we face is over-paying for a security and our entire process and suite of tools is aimed at mitigating this risk. We aim to buy stocks we deem to be trading at a discount to their long-term intrinsic value. That is our ‘margin of safety’ and that is the best risk control we know.